"When you should be buying you will be too sick to buy."
-- Wally Deemer

At 2:56 I wrote in "Will The Close Bring a Large Reallocation Trade Out of Bonds and Into Stocks":

"With the surge in bond prices (and lowering in bond yields) during the month of February coupled with the absolute schmeissing of equities, it is not inconceivable that a large asset allocation trade out of bonds and into stocks will be in the offing at the close."

Well, that was one helluva asset allocation out of bonds and into stocks -- with S&P futures rising by over 90 handles in the last 15 minutes!

I continued to raise my net long exposure today.

Thanks again for reading.

TGIF.

This has been the single most difficult week for me to perform my dual responsibility of both writing my Diary and trading/investing for my investors.
Thanks to the editors, in particular, for doing such a seamless job.
I am glad, as I am sure everyone else is, that the week is over.
Thanks for reading my Diary and enjoy the weekend.
I need a drink.
I need drinks.

Mark B

For a bit of perspective, and to ease some fears about putting money to work at current levels, here is a chart from Lance Roberts showing that we are 5-standard deviations below the 50 day moving average. A snap-back rally is likely sometime soon, but then we have to decide if its going to be a v-shaped move back up or a w-shaped with a retest of current lows before a sustained move higher - I'm betting on a w move and plan to make todays buys short term, but who knows if that is right.

With the surge in bond prices (and lowering in bond yields) during the month of February coupled with the absolute schmeissing of equities, it is not inconceivable that a large asset allocation trade out of bonds and into stocks will be in the offing at the close.

"I expect the Federal Reserve recognizes that more rate cuts would be ineffective and that the evolving market structure (and forced selling like October, 1987) and the nature of the downside catalyst (caused by coronavirus) are not rate sensitive.

Though there is now a reasonable chance that interest rates might be cut several times over 2020 (Goldman Sachs says three times this year), I expect a more immediate policy response over the weekend or before the market's opening on Monday could be forthcoming by the Fed in the form of supportive comments with regard to providing liquidity to the marketplace or some other creative message."

- Kass Diary, What To Look for From The Fed Over the Weekend
I thought this would happen on Sunday evening but it just was announced:
POWELL SAYS FED WILL USE ITS TOOLS AND ACT AS APPROPRIATE TO SUPPORT THE ECONOMY
Not surprisingly the Fed is paying attention to the risks associated with coronavirus.

Citigroup (C) is now my largest individual long holding.
Down from over $83, six weeks ago (on January 14, 2020), the shares are trading at $63.25/share.
Yes, interest rates have dropped precipitously but that is not likely going to be a permanent condition.
Investors are not considering the large gains from their fixed income portfolio which flow directly into the bank's equity.
Moreover, at the current price, company buybacks (made available by large excess capital) are much more accretive at $63/share than at $83/share a month ago as the bank can now buy more stock and at a wider discount to book value.

Citi is next week's Trade of the Week!

This morning the S&P Index almost exactly hit my 2850 "fair market value."
That's the first time since late 2018 that this has occurred.

In mid-February, no one, save the Perma Bears, considered the possibility of a large market drawdown.
Ten days later, no one, save the Perma Bulls, are considering the possibility of a resumption of the Bull Market.
Again, some things to ponder.

I expect the Federal Reserve recognizes that more rate cuts would be ineffective and that the evolving market structure (and forced selling like October, 1987) and the nature of the downside catalyst (caused by coronavirus) are not rate sensitive.
Though there is now a reasonable chance that interest rates might be cut several times over 2020 (Goldman Sachs says three times this year), I expect a more immediate policy response over the weekend or before the market's opening on Monday could be forthcoming by the Fed in the form of supportive comments with regard to providing liquidity to the marketplace or some other creative message.

I want to again underscore that the purpose of my Diary is to describe what, why, when, how and in (what) size I am conducting my investing and trading activity.
I am not recommending anyone automatically follow me and they should not automatically follow anyone on our site or elsewhere in the financial media without assessing their own risk appetite and time frame.
I pull my own trading/investing levers and you all pull your own levers.
That said, given my risk profile, I am aggressively buying stocks for my investors and for myself.
Indeed, in my personal pension plan (which invests for the future and not for the next week or month), which had no equity holdings leading into this week's drop, is now about 70% invested and I plan to go fully invested on any further decline in the market!
Frankly, if I was a short term trader (meaning measured in days/weeks) like "Rev Shark", Tim "Not Judy or Phil" Collins, Bobby Lang, and some of the many other great contributors on our site, I would probably be buying as well, but more gingerly and on a scale and not as aggressively given that machines, algos and systematic products and strategies will dictate the short term action.

I am taking (AAPL) ($260), (TROW) ($114.40), (BEN) ($21.50), (MU) ($50) and (CAT) ($119) off of my Best Ideas (short) List.

I recently sold my entire long position in Twitter (TWTR) (at $37-$38).
I am back buying this morning at $31.75.

CNN Fear & Greed is down to 9. 

The reading was almost 100 in January!

Both FB and (JPM) moved into my buy zone.
I purchased both on the opening.
JP Morgan goes on my Best Ideas List.

* Exogenous risks multiply poor market and economic outcomes in a flat and interconnected world
* When China (literally) sneezes, the U.S. catches a cold
* Just as 'portfolio insurance' was the proximate cause of 1987's "Black Monday," changing market structure (and the popularity and proliferation of ETFs and quant products and strategies) importantly contributed to this week's  indiscriminant market schmeissing
* With the benefit of hindsight it was the correct decision not to pile into stocks as equities moved relentlessly higher in the last few months
* The good news is that the advance in stocks last year (in the face of an 'earnings recession') has come to a halt, many stocks have swiftly fallen and attractive opportunities may now be lining up
* The correct response today may be to buy (and to become increasingly greedy) into the current period of fear which now can be viewed as a bona fide panic

• In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
• In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
• With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

The reason I want you to remember these questions is that the answers might serve as valuation busters in the fullness of time..."
- Kass Diary, "This Ain't No Seder, I Now Have Eight Questions" (2017)

Several years ago I offered up the three questions above to describe the risks associated with a technology-based, flat and networked world - in which coordination and cooperation increases in importance."[A]s the human-made and natural systems we depend upon become more complex, and as our demands on them increase, the institutions and technologies we use to manage them must become more complex too, which further boosts our need for ingenuity."
- Thomas Homer- Dixon
This evolution has worried me because as citizens and investors we struggle to keep up with a shift from linear to exponential change as nature and a change in market structure has had the potential to deliver humbling lessons to an age dominated by technological turmoil and our markets dominated by technological.
We live in a contingent world and, rather than captaining our fates, our social, economic and market ships are steered by currents far more powerful than us. Social and Economic Change

Nationalism and the rejection of globalism in a networked and mutually dependent world that requires coordination and cooperation have created new (and under appreciated) social and economic risks - that the markets have repeatedly ignored over the last few years.
As Danielle DiMartino Booth writes this morning in "The Great Recoupling", and I have emphasized in the past - the U.S. can not be an oasis of prosperity in a global sea of uncertainty and economic dependence.
When China (literally) sneezes, the U.S. catches a cold. Technological Change - Portfolio Insurance (1987) Redux
In my Diary I have consistently warned of the impact of a changing market structure:* The Market's Structure and a Black Swan (Called Coronavirus) Are A Toxic Cocktail of Risk

The evolution of the investment business away from active stock picking and towards (the popular and proliferating) exchange traded funds and quant strategies (e.g., risk parity) has been an important feature over the last decade. The move from passive to active investing was hastened and abetted as the SEC abolished of the uptick rule and, the risks of instability (when imbalances arose) were increased by the elimination of specialists with even more technology.
We first saw the adverse impact of (the primitive) "technology" of dynamic hedging and portfolio insurance on "Black Monday" in October, 1987 when the markets fell by -22% in one day that month. (That was the largest one day drop in history). There were two catalysts that some singled out as possible triggers to "Black Monday" - the U.S. House Committee on Ways and Means introduced a tax bill that would reduce the tax benefits associated with financing mergers and leveraged buyouts. As well, a surprisingly high trade deficit had a negative impact on the value of the U.S. dollar while pushing rates upward and stocks lower.
But, the real market culprit in October, 1987 was caused by the heightened role of technology in the markets - dynamic hedging and portfolio insurance which exacerbated the initial decline which was likely a reaction to the aforementioned tax bill and trade deficit announcements. Coronavirus "Some of these threats are undeniably affected by human action. But even if man is not the cause, failing to acknowledge the instability of our environment renders us vulnerable. We continue to build along coastlines or in forests susceptible to storms of wind, water and fire despite obvious risks. We defy nature at our own peril. And as life on earth becomes increasingly interconnected and the pace of change accelerates, we push the limits of our species' ability its environment. While it is reasonable to be optimistic about our ability to harness the power of science and technology to overcome threats like the Coronavirus, we do well to remain vigilant against such existential threats and recognize that we always remain vulnerable in a hostile universe."
- Michael Lewitt, The Credit Strategist
Just as several adverse events (the tax bill change of 1987 and the higher than expected trade deficit) started the ball rolling, and portfolio insurance overwhelmed demand for stocks with supply of stocks - coronavirus was the singular event that triggered this week's unprecedented market decline as the dominance of ETFs and quant products and strategies translated into sellers overwhelming buyers. What made investors panic is that, unlike other headwinds, central bankers can't contain the risk. That we leave to our scientists who are capable.
As also mentioned in my Diary, coronavirus was the outside force which, when coupled with the proliferation of leveraged short vol/gamma books and risk parity caused the immediate need to unwind leveraged positions as volatility begins to expand in the face of an unanticipated event.
Like 1987's portfolio insurance (which sold futures as stock prices dropped), the mechanical unwind of short vol and leveraged long risk parity spectacularly (and almost indiscriminately) overwhelmed natural stock buyers this week.The Good News
* The weekend fear trade may have already happened in Thursday's last hour of trading and in early Friday morning's future weakness
* Interest rates will be low for longer and, therefore, supportive of higher valuations

"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger--but recognize the opportunity."
- President John F. Kennedy
The magnitude of the share price drop this week (and particularly in the last hour of trading on Thursday and the continued drop in futures this morning) has likely begun or even fully discount the weekend fear trade concerns that there will be more terrible news on the coronavirus.
As I wrote yesterday, in "Be Aware of the Danger But Recognize the Opportunity" - tragedy creates opportunity and we shouldn't be silent to the potential of an upside market trade developing in the current sea of concern and fear: * If high stock prices are the enemy of the rational buyer, low stock prices are the friend of the rational buyer
* The "everything bubble" has been pierced - as speculative stocks (for example SPCE) have swiftly fallen back to earth
* According to my calculus - at the above early morning lows - the market's upside reward exceeded the market's downside risks for the first time since late 2018/early 2019* The tragedy about history is that while we may learn it we rarely learn from it - remember the words of my pal Byron Wien that"disasters have a way of not happening" as well as the wisdom of Warren Buffett (see quote below)
In all likelihood, the S&P Index made a yearly high in mid-February at 3393.
My "fair market value" for the S&P Index is 2850 and based on the low in S&P futures last night, they came within 2% of that level - to about 2090. (As I wrote yesterday, late 2018 was the last time the S&P traded below my calculation of "fair market value.)"
The S&P adjusted for the overnight drop in futures is now (8:50 am) trading at around 2910 as compared with my estimated 2020 range of 2900-3300. Though this exercise is not intended to be precise as I present, that means that, if my calculus is reasonable, there is little risk and 390 points of possible upside.
As it relates to the improving reward/risk and widening "margin of safety," Seth Klarman's 2019 letter to Baupost investors is a particularly worthy read today as prices come back down towards the area of value:"The value of an investment, of course, derives not from what the market opines at a moment in time but from the underlying business fundamentals as measured by such attributes as the cash flow that a company or asset generates - or should reasonably be expected to generate - and the growth rate and reliability of that cash flow. The stock market valuation of a company is, by contrast, an ephemeral blip on a screen indicating only where the supply of shares offered for sale meets immediate demand. Short-term market gyrations matter little unless one wishes to - or is forced to - transact."

Back to my pal, the brilliant Mike Lewitt:

"The description of fleeting electronic signals assigning values to assets in the material world is very powerful when watching money pour into a shrinking number of stocks (primarily FAANGs) and the occasional aberrant lunatic asylum like Tesla, Inc. While memories of the 2008/9 financial crisis are fading, investors are well served by remembering how quickly these signals can reverse and erase billions or trillions of dollars in the blink of an eye - literally. In fact, memories are being refreshed as we speak. The value of a company or an asset may be based on what someone else is willing to pay for it at a particular moment in time, but that is an extremely limited way of determining something's true worth. Experienced investors understand that rather than being right, the market is always wrong - it is just a matter of how wrong it is."
I am optimistic that the world's scientists will effectively deal with the existential threat of coronavirus.
I am confident that the machines' selling will be met, at some time in the reasonable future, with natural buyers and company buybacks which will likely stabilize our markets and lead to higher stock prices.
I am also confident that private equity firms, who are sitting on over $1 trillion of capital available, will grow more active and opportunistic, capitalizing on lower stock values.
I am almost certain that we will shortly see coordinated central bank action in response to coronavirus - another potential positive.
I am now of the view that interest rates will be lower for longer - supportive of higher valuations (discounted dividend and cash flow models) than I and many others previously expected.
Calling a bottom is like calling a top - it's next to impossible.
And, in times like this in which the machines are indiscriminately selling, being unemotional in investing (when many are panicking around you) is similarly difficult.
Nevertheless, the "margin of safety" has noticeably improved (as has reward vs. risk) and I am a buyer into the current backdrop of fear which now can be viewed as a bona fide panic.
My two favorite stocks are Amazon (AMZN) and Alphabet (GOOGL) .
My favorite sector is the overcapitalized banks who will likely accelerate their buybacks now as their earnings accretion looms larger as stock prices have fallen.

Danielle DiMartino Booth writes that the odds of a recession have increased markedly: 

• Recent hopes sprang eternal that the U.S. could decouple from the dual slowdowns in China and Europe; the coronavirus in California dispenses with this prospect and cements probabilities of a Fed rate cut on or before the set FOMC meeting date of March 18
• The two Italian regions in coronavirus lockdown are tourist meccas, accounting for one-third of the country's GDP, and a critical link in the eurozone's supply chain, increasing recession odds in France and Germany; California's economy, the largest in the U.S., is a similarly vital engine of U.S. growth and the country's biggest tourism destination
• In Thursday trading, U.S. and European equity, bond and commodities markets violently priced in recession; the S&P 500 staged its fastest 10% correction in history and record junk bond ETF withdrawals flag a spike in defaults partially reflecting WTI closing south of $47

There was a time "sanctuary" did not conjure religiosity. Being strategically located along commercial routes and topographically defensible against invading Germanic tribes -- a safe haven on multiple levels -- is what put Mediolanum on the map. By the time of the Roman conquest of 222 B.C., the city of 40,000 was one of the most powerful on the Roman side of the Alps. Recognizing its potential, Emperor Maximian elevated the city to capital of the Western Roman Empire. The population quickly rose to 100,000, cementing what would become and remain Italy's economic epicenter. The capital of the Lombardy Region, Milan, is the wealthiest among Italian cities.

Milan is also one of the most expensive cities in Europe for visitors -- it's both a hotbed of business activity and a beautiful place to visit, arguably boasting the world's most pristine representation of Gothic cathedrals. But tourists are scarce with Lombardy joining an increasing number of worldwide geographies in coronavirus lockdown.

The upshots are abundant, the remainder of Venice's Carnival was cancelled, leaving the tourism magnet eerily quiet. Milan's Design Week and Furniture Fairs were the next casualties and have been rescheduled until June 16-21. For context, the two surrounding regions account for a third of Italy's GDP. Expanding out to the five northern regions and the concentration rises to half of the country's GDP responsible for Italy's $500 billion export sector. Prior to the outbreak hitting, economists were penciling in 0.3% year-over-year growth, a figure that was already in question given the country unexpectedly contracting by -0.3% over the prior three months in 2019's fourth quarter.

Not only will tourism be hit, which is a surprisingly low 6% of GDP, but Europe's supply chain will withstand a second body blow in addition to the direct effect of its ties with China (see inset above). Italy is a critical supplier to Europe's supply chain. Suffice it to say, the blue bars above -- Italy's recession probability -- will be moving up as recession has now become the base case for 2020. The same can be said for France, which also contracted in 2019's last three months and Germany which skirted an outright decline but has the highest exposure to the Coronavirus via its factory sector. Make note of metrics you see in today's graph. They will be the best you will see for some time.

With Europe in contraction and China as close to recession as officials will allow to be reported, it's fair to throw out that dreaded word: "decoupling." Can the U.S. escape the same fate as China and the Eurozone? Can the U.S. evade recession?

The answer was possibly yes. Midway through Thursday trading, stocks and the yield on the 10-year Treasury bounced off their morning lows and were gaining momentum to the upside. If you blinked, you would have missed the full re-reversal as news spread like wildfire that 8,400 Californians in Solano County were being monitored for the coronavirus after 33 had tested positive.

Tucked between Napa and Sacramento in Northern California, a locale which we all are now aware of, Solano proved the disruptor in a way that made Silicon Valley resemble a backwater. As Deutsche Bank's Torsten Slok noted, by the time the closing bell blessedly rung, the correction in the S&P 500 had wiped away history, clocking the fastest 10% decline from peak levels on record, swifter even than the episode that culminated in 1987's Black Monday. The S&P 500's six-day loss is $4 trillion.

The carnage in high yield was made all the more remarkable by the exacerbation of WTI closing below $47. Investors yanked $1.57 billion from 'HYG," junk's biggest ETF, the largest one-day withdrawal on record which crowned off a fifth day of outflows. The 9.4% one-day move took HYG's assets to $15.2 billion, the lowest level since June 17th. As you see in today's second inset, a QI first, perversely, the price of HYG is only 3% off its high. Former junk bulls have been whipsawed and are now pricing in a spike in defaults.

And finally, the yield on the 10-year closed at a record low 1.26%. Market pricing of a Fed rate cut was so violent, there is now a 100% chance of a March 18th rate cut. Let me be crystal clear: If this bloodletting continues, Powell will likely convene an emergency meeting in the days to come to lower the fed funds rate before the next FOMC. The Fed is in Defcon I recession mode.

Overreaction, you say? Likely. But parallel California to Italy's Lombardy region. The Golden State might not constitute a third of U.S. GDP, but even at 15%, its $3.1 trillion economy ranks it as the world's sixth largest, bigger than Italy's, which is the world's eighth largest. California is not only an economic powerhouse, it is the top tourism destination in the U.S. Translation: the probability of recession in the U.S. just increased markedly. As is the case with Italy vis-à-vis Europe, try decoupling that.